This PhD project examines sovereign risk in emerging natural resource rich countries, especially oil and gas exporting countries.
More specifically, I study the impact of oil price returns and oil price volatility on sovereign Credit Default Swaps (CDS) spreads for two major oil producers, Russia and Venezuela. A critical question is whether oil price returns can increase the risk of default, through a rise of sovereign CDS.

Design / methodology / approach

This thesis has an empirical approach, using times series and panel data.
Concerning the time series methodology, I use daily spreads from 2008 to 2015 trough a Time Varying Transition Probabilities – Markov Switching model. As a lot of breaks can be seen in the data, a nonlinear model appears more relevant, and will enable us to study two kinds of regimes, one ”calm regime” and one ”turbulent regime”.

Empirical findings / expected outputs

Those two economies have seen their CDS rose those last years, facing financial turmoil as oil price tumbled.
The main finding is that crude oil price returns are a critical determinant of Venezuela CDS spreads returns, but does not explain significantly Russian CDS spreads changes. Indeed, oil prices seem to impact Russian CDS spread prices through the exchange rate canal. Nonetheless, in both countries, oil price volatility has an impact on the state of the economy.

Research contribution / practical implications / Originality

This article contributes to the existing literature by focusing on sovereign CDS in two emerging oil rich countries. Indeed, most empirical studies have concentrated on developed countries (Eurozone since the Greek crisis), or on emerging countries without taking into account one of their major characteristics, price commodities.
In order to better face oil price volatility, those countries should more than ever diversify their economy (like Dubaï) and better use their sovereign wealth fund.

Organized by Dominique Guégan, University of Paris 1 (Bio & CV) and LabEx ReFi head of the FinTech research Group Risks and fintech (CO738) Location: Senate House, University of London Forecasting inflection points: Hybrid methods with machine[...]